Exercise Chapter 4
Exercise Chapter 4
Exercise Chapter 4
Question 11: Fledgling Electronics is forecasted to pay a $5.00 dividend at the end of
year one. At the end of the first year the stock will be sold for $100, the growth rate of
dividend is 10%. If the discount rate is 15%, what is the price of the stock?
Question 12: The required rate of return is 12 percent. Ninex Corp. has just paid a
dividend of $5.87 and is expected to grow at a constant rate of 4 percent.
a. What is the current price of the stock?
b. What is the expected price of the stock three years from now?
Question 13: Perry, Inc., paid a dividend of $5.5 yesterday. You are interested in
investing in this company, which has forecasted a constant-growth rate of 5 percent
forever. Your required rate of return is 8 percent.
a. Compute the expected dividends D1, D2, D3, and D4.
b. What is the value of the stock today?
Question 14: Consider the following three stocks:
a) Stock A is expected to provide a dividend of $10 a share forever.
b) Stock B is expected to pay a dividend of $5 next year. Thereafter, dividend
growth is expected to be 4% a year forever.
c) Stock C is expected to pay a dividend of $5 next year. Thereafter, dividend
growth is expected to be 20% a year for five years (i.e., until year 6) and zero
thereafter. If the market capitalization rate for each stock is 10%, which stock
is the most valuable? What if the capitalization rate is 7%?
Question 15: Northwest Natural Gas stock was selling for $42.45 per share at the
start of 2009. Dividend payments for the next year were expected to be $1.68 a share.
What is the dividend yield, assuming a growth rate of 6.1%?
Question 16: Our company forecasts to pay a $8.33 dividend next year, which
represents 100% of its earnings. This will provide investors with a 15% expected
return. Instead, we decide to plowback 40% of the earnings at the firm’s current return
on equity of 25%. What is the value of the stock before and after the plowback
decision?
THE END